Other People's Money: Masters of the Universe or Servants of the People?

by John Kay

A Financial Times Book of the Year, 2015
An Economist Best Book of the Year, 2015
A Bloomberg Best Book of the Year, 2015
Shortlisted for the Orwell Prize 2016

Stratospherically authoritative. (Independent)

Should be read by everyone concerned with preventing the next crisis... barely a page goes by without an acute observation or pithy aphorism. (Economist 2015-08-21)

Kay is both a first-class economist and an excellent writer. (Financial Times)

Mr Kay is a brilliant writer. (Wall Street Journal 2015-09-25)

An admirable debunker of myths and false beliefs - Kay can see substantial things others don't. (Nassim N Taleb, author of The Black Swan)

Quite brilliant ... about as good a demonstration of Kay's skills (as economist, thinker and writer) as you are likely to find. (Andrew Haldane Prospect magazine 2015-09-17)

John Kay is one of the most engaging and accessible writers on economics in Britain today. (Morning Star)

We all depend on the finance sector. We need it to store our money, manage our payments, finance housing stock, restore infrastructure, fund retirement and support new business. But these roles comprise only a tiny sliver of the sector's activity: the vast majority of lending is within the finance sector. So what is it all for? What is the purpose of this activity? And why is it so profitable?

John Kay, a distinguished economist with wide experience of the financial sector, argues that the industry's perceived profitability is partly illusory, and partly an appropriation of wealth created elsewhere - of other people's money. The financial sector, he shows, has grown too large, detached itself from ordinary business and everyday life, and has become an industry that mostly trades with itself, talks to itself, and judges itself by reference to standards which it has itself generated. And the outside world has itself adopted those standards, bailing out financial institutions that have failed all of us through greed and mismanagement.

We need finance, but today we have far too much of a good thing. In Other People's Money John Kay shows in his inimitable style what has gone wrong in the dark heart of finance.

Genres: Economics, Finance, Business, Nonfiction, History, Money, Audiobook

368 pages, Hardcover

First published September 1, 2015

About the author

I was born in Edinburgh, Scotland in 1948, and completed my schooling and undergraduate education in that city: I am fortunate to have lived most of my life in beautiful places. I went to the University of Edinburgh to study mathematics. But, after taking a subsidiary course in economics, I decided that I wanted to be an economist. The notion that one might understand society better through the application of rigorous and logical analysis excited me – and it still does. After graduating from Edinburgh, I went to Nuffield College, Oxford. I worked there under James Mirrlees, who was in due course to win the Nobel Prize for his contributions to economic theory.

On Mirrlees’s advice, I applied for and to my astonishment got a permanent teaching post in the University of Oxford at the embarrassingly early age of 21. Oxford is a collegiate university – members of the faculty generally have both University and College appointments. This post carried with it a fellowship at St John’s College, an association which I have maintained and enjoyed ever since. Through the 1970s I developed a conventional academic career, publishing in academic journals, and writing my first book Concentration in Modern Industry (with Leslie Hannah, an economic historian colleague). My particular interests were in public finance and industrial organisation.

But my rationale for studying economics had, from the beginning, been concerned for application. My career began to change direction when I was asked to join a group to review the structure of the British tax system. This group was established under the auspices of a newly established think tank, the Institute for Fiscal Studies, and was headed by James Meade, another economist who had achieved the ultimate distinction of a Nobel prize. Meade’s rigour was as demanding as that of Mirrlees, (both delivered it with extraordinary personal charm). But the most important effect of my experience with the Meade Committee was that I began to develop a taste for the popular exposition of economic concepts.

In this vein, I wrote (with Mervyn King, now Governor of the Bank of England) a more personal account of issues in taxation, The British Tax System which ran through five editions.

Pursuing these interests, I moved from Oxford and joined the Institute for Fiscal Studies as its first research director. Soon after I became Director of the Institute. IFS developed into (and remains) one of Britain’s leading think tanks, respected and feared by policymakers and journalists for its fiercely independent analysis of fiscal issues.

After seven years, I decided it was time to move on. The success of IFS had been built on serious economics accompanied by a commitment to popularisation and application. If this could be done for public policy issues, could the same be done in the area of business policy? This was the thinking that led me to accept a chair at the London Business School in 1986 and, at the same time, to establish a consulting company, London Economics.

Over the next few years, the application of economics to business issues became my intellectual focus. During this period, London Economics grew rapidly, largely on the back of the wave of privatisation and regulatory change in Britain in the 1980s. By 1991, managing the company had become a major responsibility. I revised my arrangements with London Business School. My new contract was as Visiting Professor but my job as executive chairman of London Economics took the larger part of my time. London Economics grew until, by its tenth anniversary, its annual turnover exceeded £10m with offices in three continents and assignments in over sixty countries.

London Economics gave me insights into the business world. These came both through consultancy work with major corporations and first hand observation of the growth and development of a small business. Other activities have enriched my more scholarly work by broadening the experi

Reviews

[Athan Tolis · Rating 2 out of 5]

I never thought I’d say this about John Kay, but he needs to stop writing. He’s no longer current. He’s unnecessarily running the risk of destroying what is a tremendous legacy of contribution.

His heart is 100% in the right place.

His grasp of the principles is as strong as ever.

There are tons of ideas here that are undeniably correct, first and foremost the idea that managers of businesses must be personally liable for wrongdoing. I also could not agree more with him when he notes that the end of Glass Steagall was a disaster, because it allowed banks to (fraudulently, Enron-style) apply mark-to-market accounting on years of Net Interest Margin, generating one-time “profits” and necessitating further bloating of balance sheets to keep the gravy train going.

His knowledge of finance, however, is stuck in 1986, give-or-take, and in this book it truly shows.

In no particular order, here’s a list of stuff he gets half right / he almost gets to and then somehow contrives to totally miss / he gets flat wrong. It pains me to write it, it feels like I’m stabbing in the back an old friend, I’ve practically grown up reading and looking forward to reading his FT column, but some things need to be said:

1. He correctly notes that we have a problem of too many regulations, not too few (for the simple reason that banks find ways around the regulations and this spawns even more regulation etc.) He also correctly notes that High Frequency Trading is a scourge.

He fails to observe that High Frequency Trading did not exist (and could not exist) before a misguided piece of regulation that forced banks to give their clients the “best” price on execution of equity trades, opening the way for electronic operators to show very aggressive prices in tiny amounts, and then frontrun orders in proper size.

2. He correctly notes that we let the crisis go to waste by failing to nationalize the banks. He also correctly notes that the banks are not really “too big to fail” but actually “too interconnected to fail.” Third, he also correctly notes that banks’ trades are predominantly with one another.

It would not have been an enormous mental leap to conclude that if the government of the US had nationalized the top 5 banks, the 1 quadrillion worth of derivatives (he counts them as 400 trillion, but the LCH alone has cleared more than 500 trillion) would collapse by more than 50%, leaving them to face Deutsche, Barclays, BNP, UBS and CSFB, pretty much. Chances are this will happen in the next crisis, of course. The world can’t wait for 30 year AUD/JPY basis swaps to mature, can it?

3. Page 233 he quotes a captain who saw the bad weather coming and took a two-day detour to avoid it, only to face questioning about the delay. He’s full of praise for the captain. Why exactly, then, was it fraudulent to sell to mortgage holders insurance against the fact that they might not be able to pay their mortgage, especially as he admits that if he was born 30 years later there’s no way he could afford his house? Was it written anywhere that (i) house prices would keep going up, that (ii) interest rates would keep going down, that (iii) the UK economy would go from strength to strength? I’m NOT saying all PPI claims are unfounded, no. But to reject PPI outright as fraud is very much an ex-post type of analysis of the type he decries.

My view on this topic is actually rather sinister. I consider the PPI compensation and the swaps compensation to be a massive, stealthy and cynical act of fiscal policy. The UK government owns RBS and Lloyds and forced them (and along with Barclays and HSBC) to make very significant and very targeted payments to the UK public to help with the economic recovery, all while preaching austerity.

I know what I’m talking about. One of my former employers hired (at the behest of the UK government) outside consultants who painstakingly went through every swap ever done with an SME and split them into three categories: the ones where we were clearly at fault, the ones where the counterparty clearly knew what they were doing and the ones where there was room for discussion. The answer from the government, who had asked us to hire the consultants, came as a surprise: you’re paying out on all of them!

4. LIBOR he judges on the cosmetics, on the language of the traders on what they believed to be private chats. If that is your basis for passing judgement, you really need to keep your judgement to yourself.

The story of LIBOR is simple enough you can summarize it in ten lines: once upon a time (Kennedy administration) there was a tax imposed on interbank transactions in the US. So US banks started making all their interbank payments in London. If you knew you would need money, you’d “go low” in your submission and if you knew you would be lending money you’d “go high.” Next, two things happened: (i) interbank lending decreased in importance and (ii) the derivatives market went from zero to 1 quadrillion dollars. That’s one million billion dollars. And derivatives largely set off of LIBOR. Banks, being profit-maximizers (tut tut) realized that they should “go low” if they were net-net across all derivatives fixing that day “paying” today’s LIBOR and “go high” if they were net-net across all derivatives fixing that day “receiving” today’s LIBOR. So they did exactly that. The end.

As John Kay correctly notes, transactions between banks are a large multiple of transactions between banks and their clients. This is actually a protection for clients. Because they borrow money against LIBOR, clients collectively pay LIBOR fixings. The fact that all these derivatives exist means the banks’ incentive that would normally have been to always set LIBOR high is mitigated by the fact that transactions with corporate clients are a small part of every bank’s book. I’d go one further and say corporates fully know this, and that’s how come they are comfortable fixing their issues off of LIBOR!

Finally, even if LIBOR was to some extent “a fiction” since it was by 2007 a dog that was largely wagged by its tail, IT WORKED. It became the best barometer for the crisis, and the index central banks followed the closest, until of course Goodhart’s Law intervened and turned it all meaningless. These days only the cross-currency basis swaps remain meaningful, for instance currently demonstrating that American firms are issuing in EUR to take the losses on the interest against the profits they have parked in Europe that they can’t repatriate without paying tax.

5. He correctly notes that banks like Barclays and Deutsche show something like 70 trillion (with a T) of derivatives on their balance sheet and equally correctly notes that adding a smidge of equity (dunno, 5 billion with a B) is neither here nor there in terms of making the banks safer.

He fails to mention (perhaps he does not know) that the Swiss government has found a solution to this problem: it has asked Swiss banks to count as an asset the winnings on those derivatives and to count as a liability the losses on those derivatives when it comes to computing the necessary capital they must hold. I’m not familiar with the specifics, but this simple measure was enough for both UBS and CSFB to exit the business of trading pretty much instantly. So we HAVE an answer to the problem of “too many derivatives,” it is to account for them properly. It is the willingness to apply this solution that is lacking.

Next, he notes correctly that the French and German governments have failed to force BNP and Deutsche to recognize losses because the banks in those countries are part of a rather dirigiste approach to government, and further correctly notes that the flow of money is (i) declare a profit (ii) pay it out as bonus to top management and even does the math to show the UK government collected GBP 17 billion in income tax receipts from banks’ employees versus GBP 2 billion in corporate tax.

And then he fails to make the ultimate connection: The coffers of the treasury are the single biggest beneficiary of the “bezzle.” Exactly why would the UK government crack down on a business that pays everybody’s bills? All they will do is allow it to carry on and slap banks with continuous fines for both real crimes and made-up crimes like using bad language in your communication while you are doing the very job you were hired to do, in the hope of getting a large bonus, that the government positively wants you to receive so it can get its hands on 45% of it.

On the same subject, he further notes that most of Europe’s business is done out of London. For every corrupt manager of a Bulgarian airline’s air hostesses’ pension fund or Greek journalists’ pension fund (guess how the word got out) you also need a corresponding derivatives salesman out of London to sell him the requisite off-market derivatives. 45% of the bonus the derivatives salesman got (past tense, because all those pools of money are now fully depleted) ended up in the UK Treasury’s coffers, thank you very much.

In summary, it is the WILLINGNESS we lack and not the ways. The Swiss have shown the way.

So that’s five examples where John Kay got the basics right and failed to get to the correct conclusions because he no longer understands how the business works. I could go on, but you get the point.

I can forgive him the above, he’s doing his best. Reading his book actually helped me clarify some things in my mind because he lays it out nicely and, much as he fails to reach the correct conclusions, it’s largely all there and a reader who knows about modern banking can put it all together.

In his old age, however, John Kay is taking some rather nasty turns:

He claims the Halifax went down because it entered trading. Erm, no. The Halifax / HBOS went down the traditional way, selling mortgages. You can say that this coincided with the time when they decided to trade bonds (they hired the unbelievably intelligent and skillful Linus Wright to run that business for them, inevitably from Goldman Sachs, and he continues to do very well trading for himself under the umbrella of an American hedge fund) but to say that the Halifax went down because it espoused trading is plain wrong. And John Kay has to know that’s wrong. They went down lending money against overpriced real estate to people who could not meet their mortgage payments. Period.

Most toxically, John Kay has turned against the essence of capitalism, which is the validation of price via the arm’s length transaction between two willing counterparties.

We should not subsidize these counterparties’ trading.

We should not use these prices to value long-term banking transactions.

We should not deify the traders.

But we should equally not be surprised when a player who can turn around a zero-sum game (for example, what Maradona did for Napoli in the Campionato) can negotiate for himself terms superior to everybody else’s put together. We should celebrate it for traders every much as we do for footballers. Provided, of course, we are not stupidly subsidizing their potential losses.

To cut a long story short, “Other People’s Money” is a Luddite’s manifesto, urging us to go back to 1986. And it gets worse the deeper you go. It cost me valuable reading time I won't get back.

[Peter · Rating 5 out of 5]

John Kay is a British economist who once taught economics at Oxford and is now a professor at the London Business School and an editorial contributor to the Financial Times. His 2015 book Other People’s Money should be added to the long and sagging bookshelf on how the nature of the financial services industry (here denoted FSI, and including both commercial banking and shadow banking institutions) has been perverted from its original mission to its present sad state as a source of great benefits to the managers and correspondingly great costs to clients, and on the consequences of this transition for income distribution and economic stability.

This is a well-written and thoroughly researched book. As I read the book I found myself asking, “Why doesn’t Kay mention this?” And then he does! To my mind, this is as thorough a book on the topic as I’ve read. While there is little “new” in it, it accurately details the long list of successes and failures in our modern financial system. It is an excellent synthesis of ideas that have been discussed since the 2008-9 debacle, and to my mind, it asks the right questions. The only areas in which I have much to add are the prospective questions about the future—what should be done about our problematic financial system.


What Went Wrong? Part I Financialization

Kay puts many of our problems at the doorstep of financialization, by which he means converting all characteristics of a relationship to a financial calculation. One form of financialization is rejecting the age-old idea that the proper objective of a business is to maintain a relationship among several constituencies or stakeholders (shareholders, management, labor, suppliers, customers) in favor of one stakeholder: the shareholder. This conversion began with the ascendency of the idea that the function of a business is to create value-added for the shareholder—the provider of capital. This shift was made with the blessing of the economics profession; many (but not all) economists argued that maximizing the value for the shareholder also maximized the welfare of society. The interests of labor and other stakeholders were subordinated to those of the shareholder.

Another form of financialization was the reduction of risks to a financial basis and the creation markets to trade risk. As will be detailed below, the business model of banks and other financial institutions changed from originating loans and holding them to maturity to simply originating the loans, then selling them to other institutions. Thus, the risks were sold off and the originating institution simply serviced the loan—collecting interest and dividends and paying those (less a fee) out to the new holders of the loan. This created a new primary profit center for banks and other institutions—the trading desk.

What Went Wrong? Part II: Trading and Risk-Shifting

Kay traces the recent financial crisis to a series of incentive failures, that is, rewards to the FSI for doing the wrong things. To focus the discussion, Kay asks why the top people in the FSI (the owners and managers) make so much money. He correctly notes that most of this money is not made in financing “real” trade or business activity; it is in trading fundamental securities (stock and bonds) and in creating, selling, and trading derivative securities like credit default swaps, term structure swaps, equity swaps, collateralized debt obligations, mortgage-backed securities, options, and financial futures.

In the good old days, a manufacturer wanting to build a factory would sell securities (stocks and bonds) through an investment bank to acquire the necessary funds. The investment bank, a member of the FSI, would sell the securities to ultimate investors—primarily wealthy individuals, insurance companies, and personal trusts; later on, new financial institutions like pension funds were added to the list. Bonds were often held to maturity, and stocks might be inherited over several generations. Secondary markets were limited except for government securities and some private securities (mostly railroad and other infrastructure bonds). Trading was not a source of much value added beyond the revenues received to cover the costs of trading.

But over time, and particularly with the rise of computer technology, the potential for low-cost and frequent trading increased, and institutions rose to serve the trading community. The secondary markets expanded to feed the traders, both private and quasi-public (like Fannie Mae and Ginny Mae in the mortgage markets). New trading-oriented institutions like mutual funds and ETFs developed and grew. These new members of the FSI served an important need: they provided liquidity—the ability to quickly find someone on the other side of a trade—and they allocated securities to the investors that valued them most. These innovations reduced the cost of capital for real businesses, increased the capital intensity of production, and raised labor productivity and wages.

By the 1990s we had a very different FSI. The securities sold by the factory-building business were still sold by investment banks and bought by the FSI, but the modern FSI is a trading organization, not a financing organization. At its trading desks all publicly registered securities are actively traded—the securities originated to build the factory are rapidly sold in a secondary market, a secondary market created just to allow those transactions. Fannie Mae and Ginnie Mae provided a secondary market for mortgages—hence allowing the mortgage originators (commercial banks, thrift institutions, mortgage bankers) to profit from managing the accounting and payments associated with the mortgages without having the risk of holding them; the result was an explosion in mortgage lending. The rise of markets for derivative securities that provided ways of insuring (or taking) risks has allowed an explosion in that trading. The name of the game has been Shift the Risk, or, put more positively, allow risks to be held by the parties most suitable for holding them (the parties that will pay the most to take the risk).

Shift the Risk can be a win-win game if both the risk-seller and the risk buyer are equally knowledgeable—if buyers really know what they’re buying. Indeed, that was the pre-2008 foundation for the widespread view among economists that allowing parties to buy and sell risk was a good thing. After all, hadn’t we been doing that for centuries in property insurance? Thus, with the blessings of the economics and finance professions, the urging of the potential risk traders, and the accession of the regulators, the modern FSI created a dizzying array of derivative instruments—credit default swaps, term structure swaps, equity swaps, collateralized debt obligations, Special Interest Vehicles, options, futures and other derivative securities—all designed to redistribute the risks and returns from the original securities. To Shift the Risk we added Slice and Dice—the creation of security bundles like Collateralized Debt Obligations. And the attention of the FSI turned to trading as new types of FSI institutions grew up the buy the risks—hedge funds, ETFs and so on.

Trading in competitive markets—and the securities and derivatives markets are as competitive as you get—is a business with razor-thin profit margins. But thin margins can be leveraged into large profits when trading is frequent and in large denominations, and when trading costs are low. All of these were achieved in the security and derivatives markets. The huge amounts traded in today’s security markets, and the high frequency of trades, converted the Trading Desk from a ho-hum necessity to a major profit center. The profits accrue to the providers of the capital—the trading desk’s owners—and to the managers of the trading desk. They do not accrue to the lower-level workers—the accountants, the clerical staff, and the managers of the IT department.

Hence, the very high incomes earned by owners and senior management at FSI institutions. Since so many of the top earners are in the FSI, it is significant contributor to the widening of the income distribution in the U.S. and around the world. If the golden-age FSI had remained in place, the income distribution would look much less skewed toward the “one-percenters.”

What economic forces underlie the vast earnings of the FSI? At heart, the answer is investor ignorance at the retail level, stated differently, the assumption that creators and sellers of risk-sharing instruments are no more knowledgeable than the buyers is a sad fiction. Economists refer to this as asymmetric information. When one side of a trade knows more about the quality of the product than the other side, that information gives the “informed” trader an edge over the “naïve” trader: just as the used car salesman knows more than the buyer about the quality of car on his lot, so the creator of a Collateralized Debt Obligation knows more about the securities bundled into the CDO than the buyer. Under these circumstances, trading isn’t a “fair game”—the naïve party will give up much of the income to the informed party. The result is a shift in income distribution in favor of the better-informed parties, and a consequent incentive to increase the creation of confusing products to be traded. All the institutional changes in the FSI did was to put this truth on a higher playing field by allowing the trading mentality to flourish.

What to Do About It: Part I The Prospects for Regulation

The traditional answer to adverse incentives and misbehavior is regulation. But… the 1933 and 1934 Securities and Exchange Acts and subsequent legislation didn’t stop Bernie Madoff from scamming his clients for decades…the 1933 and 1934 Banking Act and subsequent legislation designed to prevent bank failures didn’t prevent an explosion of failures after 2008… the creation of the Commodities Futures Trading Commission in 1974 didn’t stop the collapse of markets related to derivative securities like swaps and options. And these massive failures are only extreme examples: there were many more examples of regulation failure, not least among them the deregulation of thrift institutions in the Garn-St. Germain Depository Institutions Act of 1982 .

Why hasn’t regulation worked, and what are the prospects for the new Dodd-Frank regulation of banks and financial institutions? Here Kay strikes a very reasonable and realistic note. Regulation as it has been structured—a system of codified rules of behavior—is inherently ineffective. The primary visible consequence is the addition of new regulations when existing regulations fail to stop inappropriate behavior. Regulation is like the Ptolemaic theory of planetary motions: each time a new motion is observed—as in Mars’s occasional retrograde motion—the response is not to look for an entirely new model (as did Isaac Newton), but to add another wheel or gear to the model to explain the observed anomaly using the old model.

There are three primary reasons that rules-based regulation will continue to fail. First, as Kay points out in discussing the Basel I and Basel II Agreements to establish uniform international banking regulations, rules can be “gamed” so that balance sheets can deteriorate even though the accountants say they are strong. Second, financial markets are very innovative—smart people driven by profit find new ways to do the old things, new ways that don’t violate the letter of the rules; and it’s the letter that regulation controls. Third, any detailed description of what you’re responsibilities are necessarily fails to cover all contingencies. Anyone with teenagers knows the result. must do is

What to Do About It: Part II Reforming Regulation

Here Kay gets to repeat the essence of his message. Our financial system has failed to be robust—that is, righting itself after shocks hit—because it is too complex, financial systems are too inclusive in their functions, and there is little transparency. The goal should be to reestablish those properties.

Complexity has led to a long list of linkages between the originators of financial instruments and the ultimate owners. The mortgage industry is a solid example. Banks (primarily investment banks) originated loans but relied on ratings agencies to rate their quality, on mortgage bankers to vet the risks, and on commercial banks and the commercial paper market to finance their holdings—this created extra links were part of the ensuing problems. Then the banks sold the mortgages—and their risks—to others less able to assess them. Every one of these linkages failed—the use of short term loans to finance holding of long-term loans shifted risks to commercial banks and to money market funds, the abject failure of the ratings agencies to understand the risks combined with mortgage broker indifference to loan quality turned worst-case risks into reality. Kay argues for tightening these links by requiring the originating institutions to hold the loans they make, relieving them of the option to make bad loans and offload them, and by separating the shadow banking system from the commercial banking system.

Another aspect of the financial industry has been its inclusivity—banks wear too many hats. Banks (both commercial and investment) have been lenders, traders, and assessors of risk. Kay would restore commercial banks to their earlier roles as deposit takers and lenders in low-risk markets like government securities. This was a recommendation made many years ago by Milton Friedman, though for different reasons. Kay would also have risky activities performed by nonbank institutions with no Good Housekeeping certificate of approval, and financed by appropriate sources.

Transparency would reduce the possibility of asymmetric information and inform investors of risk concentrations that might be problematic. Investors would better understand their risks, would acquire them from institutions that have few links to the payment system managed by commercial banks. Trading exchanges would disseminate information about who holds the nations risky claims (an example, derivative transactions would be operated by clearing houses that would collect and report long and short positions of derivatives held by members—derivatives players would know when risks were getting concentrated, as when Lehman had massive short positions in credit default swaps.

[Keen Reader · Rating 3 out of 5]

“The complexity of modern finance has been designed, and has operated, principally to benefit financial intermediaries rather than the users of financial services.”

A broker is an agent a dealer is a trader and you should beware of them all. There is some enlightening historical background in here, as well as the usual subjects like Bretton Woods and the rampant deregulation in the US and the UK from the 70s onwards, we get some details about the Anti-trust movement and the Sherman Act which did much to tackle the greed of the robber barons and their cohorts.

“The focus of regulation has shifted from protection of consumers to protection of markets.”

We see that journalism by the likes of Upton Sinclair and Ida Tarbell was key in bringing the scale of the greed and hardship to a wider audience but it was really only fully realised after the assassination of pro-business president William McKinley, which made way for Teddy Roosevelt to get stuck into the robber barons.

“The finance sector today plays a major role in politics: it is the most powerful industrial lobby and a major provider of campaign finance.”

We see that in the same way that so many celebrities confuse fame with talent, too many in the finance industry mistook luck for skill. After all this was a financial crisis which even left a trail of Nobel Prize winners looking more than a bit silly and dangerously flawed.

“A country can be prosperous only if it has a well-functioning financial system, but that does not imply that the larger the financial system a country has, the more prosperous it is likely to be.”

Certainly this is a little dry at times and there are many easier reads on the subject, but overall Kay is good enough company and I learned some more about the twisted beast that is the global financial industry, but as is the case with most of these kinds of books the future for those who are not part of the 1% or at the wealthy end of the financial industry, does not look too great money wise, but that’s alright as long as those hard working bankers get to enjoy their multi-million dollar bonuses and keep paying off the same politicians whether through lobbying, offering jobs, or donations it all amounts to the exactly the same thing for most of us.

“Modern financial conglomerates are not so much engines generating large profits as institutions that survive as a result of public subsidy.”

[Marrije · Rating 4 out of 5]

Fantastically angry and informative dissection of how financialisation ruined the economy, and what is to be done. It went a bit over my head at times (this stuff is pretty complicated), but sticking with it paid off. Kay's very British sense of humour also helped.

[Mehrsa · Rating 5 out of 5]

This book is readable, informative, and most importantly, it is right. The author accurately describes and diagnosis some of the major issues in finance today. I had a few disagreements with him--especially on whether banks are indeed different than other enterprises (his main point is that they are not), but I think his points are all supported by academic studies and especially by reality.

[Meghan · Rating 3 out of 5]

This was a slog for me. I don't think I picked up much that I didn't already know. But I didn't disagree with anything Kay wrote. I think it's an important message and I'd recommend it to anyone trying to learn more about the topic, so I can't bear to give it anything less than a three. It's just overkill for anyone steeped in this industry.

[Nick · Rating 5 out of 5]

A large number of people suspect that most of what goes on in the finance industry is both slightly dodgy and fundamentally pointless, with very large rewards going to people who do nothing to make anyone's lives better. However, not many people outside the industry have enough knowledge of what it does to make this argument this from an informed perspective.

John Kay is extremely rare - someone who understands the industry, an insider in many ways, but also a fierce critic of most of what the industry does. And yet he more or less shares the view of the person in the street when it comes to the pointlessness of much of modern finance.

Kay argues that there is nothing special about the finance industry and it should be judged as we would judge any other industry. For example: what does the airline industry do? Provide metal tubes that get us from A to B in varying degrees of comfort with a high degree of safety. What does the finance industry do? Facilitate payments, pool risks (insurance), provide capital to businesses ("search"), look after our assets ("stewardship"). In short, provide services to the 'real' economy.

And yet, how much of what the finance industry does is concerned with doing those basic jobs better? Very little. The modern finance industry, argues Kay, spends most of its time trading with and talking to itself. The City of London sucks in some of the best brains in the country, and yet these brains are employed in activities which do nothing to improve the level of service the finance industry offers its clients and customers.

How have we got into this mess? In a word (a somewhat ugly word), financialisation. Kay sums it up with a simple but effective metaphor. All the real assets in the country - businesses, household savings, property - are owned by somebody, and these claims can be represented by bits of paper (the fancy word is "securities"). It doesn't take much insight to see that however many bits of paper you create to represent these claims, and however fast these bits of paper change hands, the real wealth of the country - its businesses, savings and property - doesn't change in value.

Yet the finance industry is obsessed with creating more and more bits of paper - not just securities, which are claims on assets, but derivatives, which are claims on claims on assets. The root cause of the financial crisis was that banks, which had once confined themselves to accepting deposits and making loans, thought they could boost their profits through creating and trading ever more complex financial instruments, completely forgetting about the nature or quality of the underlying real assets (most notoriously, sub-prime mortgages).

Kay uses Charlie Munger's word "febezzle" for the illusory wealth that is created through such activities. Much of banking profits in the years leading up to the financial crisis was febezzle, a theft from the future that had to be paid back rather suddenly (mostly by the humble taxpayer, who footed the bill for bank bailouts in the US and Europe). But in an industry where the incentives of executives and employees are short-term, there is a culture of "I'll be gone, you'll be gone."

Another key theme of Kay's book is the replacement of trust relationships in finance with transactional relationships. Financial advisers became salespeople for financial products. Bank managers who looked you in the eye and decided if you were good for a loan (and who you might see on the golf course) have been replaced by credit checks and other impersonal processes. Individuals looking to buy a financial product such as a fund, who might once have relied on a trusted company or person to do the job for them, are deluged with reams of information in the name of 'transparency' - information they don't read, can't understand, and lack the ability to interpret. Regulators aim to 'maintain confidence' in the financial system, rather than help to create the sort of system that would inspire confidence.

Not all developments in the industry have been bad - and trust relationships were sometimes abused. However, it is hard to argue with Kay's main point that the lengthy and obscure chains of intermediation in the finance industry do little to benefit the individuals and businesses who are the ultimate users of its services. Nor does the relentless pursuit of market "liquidity" - the ability to trade large amounts of securities quickly - which is something the vast majority of individuals and businesses neither want nor need.

The remedies imposed on the finance industry after the 2007-9 crisis were the right ones in the short term, says Kay, but absolutely the wrong ones in the long term. Banks should have been forced to split off their deposit and lending businesses, which enjoy explicit or implicit guarantees from the taxpayer, from their trading activities, which do not need or deserve such guarantees. If this had been done, there would be less need for the reams of regulation that burden the industry without protecting its users.

Part of the problem, though, is that politicians of all persuasions have bought into the idea that finance is special, untouchable - the goose that lays the golden egg. Before the financial crisis, Gordon Brown was one of the most ardent advocates and admirers of the City of London. George Osborne was barely out of his job as Chancellor when he received an offer to work for one of the world's largest asset managers. In the US, the links of both the main parties with Wall Street run deep.

If only key people in government and at the financial regulators read this book, that might be a useful first step to building a finance industry that works better for the people it is supposed to serve.

[Mark · Rating 4 out of 5]

Money often costs too much -- Ralph Waldo Emerson

Asking "what is finance for," Kay performs a near-flawless take-down of the industry as he examines how finance has devolved: from the community-oriented maintenance of payment systems, housing and infrastructure finance, retirement planning, risk management, and the facilitation of R&D and new ventures, to an insular club run by entitled, unpleasant, domineering individuals (aka sociopaths), who primarily trade and deal with each other to the detriment of society.

Kay's solution? Well, there may not be one that someone like Kay can provide, given the complete failure to make any meaningful corrections after the latest financial crisis. Not to knock Kay. He is very much in the mould of Galbraith and Michel Albert. He is not a friend of convention, but is a reluctant revolutionary.

Perhaps unwittingly echoing Graeber's Iron Law of Liberalism, elucidated in The Utopia of Rules: On Technology, Stupidity, and the Secret Joys of Bureaucracy, Kay notes that regulations do nothing more than create more profit streams for the kleptocrats and their parasitic enablers in accountancy and law. And deregulation only creates more rules, with few exceptions.

The solution mentioned throughout the book but given only about thirty pages at the end to exposit is one that Kay admits is unlikely to be implemented, particularly in the US, which "seems beyond repair": structural reforms that suck the capital out of proprietary trading, the utterly unproductive activity that accounts for over 90% of Finance's so-called profits--derived from capital, energy, and talent stolen from other sectors of the global economy. Taking the money out, Kay argues, will change the incentives back to ones supportive of the community.

Perhaps the ongoing extreme shift in monetary policy, from one extreme to another--clearly intended to strangle labor's renewed attention to justice and keep the masses' attention on securing the basics of life--will have the unintended but welcome consequence of pulling massive amounts of capital out of Finance.

It is happening now, to a small degree. PE is struggling to meet fundraising targets. Despite the abundance of "opportunities" that not long ago would have been at the center of battles between drooling pencilnecks, many of these in the real economy and even the financial economy now go unfunded. After finding themselves with so much liquidity in the 2010s that VC and PE investors were actually financing new ventures and taking on some risk instead of exclusively cannibalizing existing, once productive companies via LBOs, they are now in retreat. Leveraged funds are eying the renewal of their mountains of low-interest debt with palpable dread. The screw is turning.

How will it end? Not through electoral politics, no. Capital allocated to politics will be the last thing to shrink in any meaningful way--it is after all only crumbs. Largely held off the books as catastrophe insurance, out-of-the-money puts that will once again save Finance and its sociopathic leadership. To a limit, anyway.

The imploding bubble in commercial real estate will be horrifying but interesting to watch. With the summer ending, it will be increasingly difficult to hide the sustained fall in office occupancy rates. Falsified information and cheap long term debt alone keeps the bubble's skin taut. Friendly accountants and captured regulators will, at some point, act in their own self interest to proclaim it hollow. And then what? Carnage, yes. Another financial crisis that hits everyone else much harder than those who caused it, yes. More public anger. Rage. Demagogues who attempt to channel that rage away from the rightful targets towards "others" of all kinds.

It's really up to the rest of us, the 99%, to not waste the next crisis.

[Breakingviews · Rating 4 out of 5]

By Edward Chancellor

In the laissez-faire world of Adam Smith, when individuals pursue their own selfish interests they unwittingly contribute to the benefit of all. That may be so when people are acting for themselves, as principals in the exchange. But a problem arises when they use agents to transact on their behalf. Agents, of course, have their own interests at heart. As John Kay shows in his new book, “Other People’s Money: The Real Business of Finance”, in the financial world when conflicts of interest become widely abused, all hell breaks loose.

This is not a new problem. After the 1929 Crash, Wall Street’s copious abuse of conflicts of interest was revealed by stories of insider trading, market manipulation and the flogging of dodgy securities to an unwary public. New Deal legislation created the Securities and Exchange Commission to regulate financial markets and improve company accounts. “Sunlight,” as Supreme Court Justice Louis Brandeis had earlier opined, “is the best disinfectant.” The Glass-Steagall Act of 1933 separated commercial and investment banking operations on Wall Street to protect depositors from bank losses in the securities markets.

The history of Wall Street since has been one of the progressive emasculation of New Deal regulations, together with the revival of conflicts more extensive and pernicious than ever before. During the 1970s and 1980s, most Wall Street partnerships turned into public corporations. Bankers and brokers now acted as agents for outside shareholders. Two centuries earlier, Adam Smith had warned about the dangers of such arrangements: “The directors of such companies … being the managers of other people’s money (rather) than their own, it cannot be expected that they should watch over it with the same anxious vigilance … Negligence and profusion, therefore, must always prevail more or less, in the management of the affairs of such a company.” Smith might have been writing about Bear Stearns under Jimmy Cayne or Dick Fuld’s Lehman.

Once Wall Street’s partnerships had disbanded, bankers ceased being “long-term greedy”, as a Goldman Sachs managing partner had enjoined in the 1970s, becoming instead short-term rapacious. Long-standing relationships with clients were replaced with transactional relationships. A trading mentality came to dominate Wall Street.

Over the past couple of decades Wall Street’s conflicts of interest have become notorious. During the dot-com bubble, flaky companies were touted by the analysts whose investment bank employers were hungry for underwriting fees. In the course of the credit boom, such abuses became more extreme and far more dangerous to financial stability. Goldman and other Wall Street firms knowingly sold packages of toxic subprime securities to unwitting clients (like German banks) which had been put together with the collusion of other clients, such as the hedge fund manager John Paulson, looking to profit from the imminent credit crunch.

The banks were blind to the disastrous consequences of their behaviour, despite sitting on piles of financial and economic information. It’s easy to understand why. As the American journalist Upton Sinclair, cited by Kay, remarked: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

The dysfunctional character of finance has many ill consequences, besides the occasional financial crisis: Capital is misallocated; savings are wrecked; a bloated financial sector attracts the best and brightest whose skills might have been put to better use in the real world; mind-bogglingly large bonuses and the perception of rewards for failure (such as the $3.6 billion of bonuses paid by Merrill Lynch in 2009 after the broker had collapsed into the arms of Bank of America) contribute to inequality and foster a sense that the system is unjust.

Occupy Wall Street may have gone away for now, but the recent appointment of a 1970s-style socialist to head Britain’s Labour Party and the rise of Bernie Sanders as a Democratic presidential contender are signs that popular discontent with finance could still upset the established political order.

What is to be done? As Kay points out, most financial regulation – including the voluminous Dodd-Frank Act of 2010 – merely adds to the complexity of the financial world. Regulation even acts as a barrier to entry, entrenching the market dominance of the leading investment banks. It fuels Wall Street’s favourite game, “regulatory arbitrage”, which, as Hyman Minsky observed, involves clever financiers finding ways to get around the letter of the law in order to engage in risky and profitable activities. What’s needed, says Kay, is structural change, such as a separation of deposit banking from investment banking, along Glass-Steagall lines. Kay also abhors the U.S. government’s tendency in recent years to impose large fines on banks, which are paid by shareholders, rather than go after the banker-perpetrators.

“Other People’s Money” is a well-written and comprehensive account of the agency problems afflicting modern finance. Kay, who lately compiled a report for the UK government on the curse of short investment horizons among equity investors, is well suited to handle this subject. Rather too much of the book covers the familiar ground of the run-up to the global financial crisis. He could usefully have devoted more space to Wall Street’s long and infamous history of abusing conflicts of interest.

Kay wants to get financiers to extend their time horizons. Yet his reform proposals aren’t ambitious enough. Wall Street’s bonuses are paid annually out of current earnings. Yet the results of the bankers’ activities play out over a number of years. More needs to be done to link fees and bonuses to these long-term outcomes.

Here’s a simple suggestion which might achieve more than all the “macro-prudential” regulation of recent years. Investment bank bonuses should be held in a special account, invested in the bank’s shares, until the banker’s retirement. All fines would be paid out of this pool. HSBC has already made a move along these lines. If bankers were to start thinking again like partners, they might handle other people’s money with greater care.

[Ian Fraser · Rating 5 out of 5]

For me, John Kay's 'Other People's Money' ranks among the top 5 per cent of books about finance and economics. It encapsulates everything that is wrong with our current financial/banking system in a witty and sometimes almost semi-detached way. Kay brilliantly debunks many of the dangerous delusions that remain persistent in the sector, despite the existential near-miss of September-October 2008. I found myself agreeing with almost everything Kay writes in this book - even when he writes with Olympian disdain.

Stand out sentences for me include:

"It is hard to overstate the complacency that characterised the period form the bursting of the internet bubble to the global financial crisis"

"the bezzle and the febezzle, the money borrowed from destiny, was paid to senior employees of banks. Large financial conglomerates were run for the primary benefit of the people who managed them - and, in the main, they still are."

"Return on equity is an inappropriate performance metric for any company, but especially a bank."

"There is a pressing need to focus regulation more on the interests of consumers and less on the integrity of market process".

[Enhee Tsoodol · Rating 3 out of 5]

Ойрд нойр хүрэхгүй баларч байнаа, энэ номыг уншаад ч нэмэр алга гэхгүй юу кк. За ерөнхийдөө бол жаахан нэг талыг барьж бичигдсэн ном шиг санагдлаа. Бодлого боловсруулагч, академич Жон Кэй нь энэ номондоо 2008 оны дэлхийн санхүүгийн хямрал, түүнийг бий болгосон үндсэн шалтгаануудыг задлан шинжилжээ. Одоо байгаа санхүүгийн систем бол шаардлагагүй бөгөөд хэрэгцээгүй нүсэр, энэ салбарт ажиллаж байгаа удирдах ахлах ажилтнуудыг улам хөлжүүлсэн, зүгээр л бусад хүмүүсийн мөнгөөр хайр найргүй тоглох боломжоор хангасан тогтолцоо гэсэн байна. Цаашлаад "I'll be gone, you'll be gone" буюу ирээдүйд гарах үр дагаварыг огтхон ч тооцохгүйгээр одоо л аль болох их мөнгө олж байвал гэсэн шуналтай, увиагүй хандлага санхүү болон банкны салбарт ноёлдог тухай боломж гарвал энэ номондоо дурдсан байх юм. Гэхдээ энэ нээрээ ямар удаан уншигддаг ном бэ бурхан минь. Уншаад л байдаг хуудас нь ерөөсөө явж өгөхгүй байсан шүү

[Brooke · Rating 3 out of 5]

I would have learned a ton if I paid better attention. But it was kind of hard to follow since I'm not familiar with banking history and regulation. The main takeaways are that the finance world is greedy, impersonal, and overly complicated to the point that it's hard to regulate. Bankers used to have personal relationships with the people who the took loans from and loaned to. Now, bankers and financiers are playing with the money of people they don't know or feel beholden to. The mentality is "I'll be gone, you'll be gone," meaning lets get in and make as much money as we can't without regard to future consequences. And they seem get away with that because the U.S. government is always there to bail them out. Also because individuals rarely if ever see legal consequences or punishment. If a stock broker or whoever does something dishonest, the institution gets fined, and the individual walks away, no jail time.

I'd recommend this book if you are committed to sitting down and really thinking this one through. Don't listen on audio 1.5x speed.

[Racquel · Rating 2 out of 5]

DNF at 33%. It started off great but dissolved into an unorganized mess of information and commentary.

[Popup-ch · Rating 4 out of 5]

The history of financialisation.
John Kay mourns the era when bank managers knew their customers and schmoozed them on the golf course. In the run-up to the financial crisis they were replaced by intermediaries who slice up mortgages into tranches that are sold off to the highest bidder, creating a short term windfall for everyone in the business, but adds no added value. Instead of a long-term relationship between the butcher, the banker and the candlestick maker, which relied on internal trust, the 'financialisation' has replaced this interpersonal trust with heavily regulated risk calculations - that can be gamed by the legions of skilled manipulators that has shot up in recent decades.

Using German phraseology, he bemoans the conversion of Gemeinschaft into Gesellschaft, by which he implies a loss of collective responsibility and instead an increased focus on the bottom-line only.

Today's banks are incredibly leveraged and heavily focused on trading, with results best described in Taleb's vocabulary of 'Black Swans' - high-impact unlikely events; and with the increased amounts of trading, these unlikely events become almost inevitable.

[Niko Jaakkola · Rating 4 out of 5]

This is a very good exposition of what has gone wrong with the financial sector in the past few decades. Falling asleep already...? Remember, this is the sector which gave us the 2007-8 financial crisis, the ensuing Great Recession with a decade of stagnant living standards, which in turn has given us a major political crisis across Western democracies. This is important stuff!

Finance is, at heart, the process of transforming the savings of consumers into capital, which is then made available to people with good business ideas. The resulting profitable businesses then pay a return on the capital, basically the interest rate on the savings, allowing people to save for a rainy day or for their pension. Kay argues that this process has gone badly wrong in the past few decades. In an phenomenon he calls 'financialisation', financial sector participants have been able to gradually turn the boring business of taking deposits and writing mortgages into a casino -- but a casino with a twist: the taxpayer will guarantee any severe losses.

Financialisation has happened gradually. Kay gives a very useful history of how what started out as regulatory arbitrage -- the arranging of currency trades to exploit differences in regulation between Britain and the US -- was fed by deregulation by Reagan and Thatcher, and further led to financial 'innovation' -- the invention of novel assets to trade, such as futures, derivatives, synthetic collateralised debt obligations -- often exploiting ever more esoteric loopholes in regulation. Crucially, starting in the 1980's with Lew Ranieri at Salomon Brothers, the culture of the financial sector shifted: out went the local banker playing golf with local businessmen, and in came the trader, highly educated, mathematically sophisticated, and out to get rich quick.

The institutions changed too. Investment banks realised that, instead of being formed as the partnerships of old, with the partners' personal finances ultimately on the hook, they could become public companies. This limited the liability faced by the former partners -- now called managers -- and thus the risk was transferred to shareholders, and the other banks who might have lent money to you. They then merged and merged again, until they had become gigantic financial conglomerates. Previously, the roles of broker, dealer, and market-maker had been separated; in the new conglomerates, these were now confounded. Imagine your (private) doctor also owning the drug manufacturer and the pharmacy (and possibly also the fast food chain causing your health problems in the first place) and you start to see the conflicts of interest. Trading culture took over; then the deposit-taking banks wanted to get in on the action, now gambling with the funds of their small depositors. The entire financial sector metamorphosed from a rather dull, conservative business greasing the wheels of commerce, into a high-flying sector in which moral scruples were a liability, and in which ever greater profits could be made by gambling with other people's money. Greed is good!

Some financial economists argue that the real value of trading is in the fact that markets aggregate information. An average of many bets on the value of an asset -- say, a house in Tampa Bay, or a share in a corporation like Facebook -- is more likely to be correct than any single guess. In Kay's view, such 'price discovery' has been particularly damaged by financialisation. The short-term outlook of traders, and the long and complex chains of intermediation, imply that any losses are almost certainly going to be borne by someone else. As a result, traders have little incentive to gather information on these assets -- so there is less solid information to aggregate! Prices end up reflecting not the best guess over the value of the underlying assets, but rather what market participants think their counterparts think the _prices_ might be. If everybody thinks everybody else thinks the prices of bundled-up subprime mortgages will go up and up, then the rational thing to do is to follow the herd and to buy; never mind the eventual crash, or the social cost of building an armada of empty McMansions in North Liberty, Iowa.

Kay argues that we need to return the financial sector to its old boring role. Like many other commentators, he argues that we need much less, but sharper, regulation. A bill like Dodd-Frank running up to thousands of pages will always contain loopholes, and who will have the resources to exploit these? Why, the banks, of course. They have the army of well-paid experts seeking out the most profitable ways of reporting their accounts, of where to report their sales, of which countries to notionally base their various activities in. Thus, simpler, easier-to-monitor regulations are required. In this, Kay is very much on the same page with many other commentators, including Anat Admati and Martin Hellwig, whose book 'The bankers' new clothes' argues for simple, and high, capital requirements for banks.

But Kay goes further. He wants to change the culture of the sector; he wants the different roles of actors in the financial sector to be separated again, so that those who are stewards of other people's money will again hold an ethic of responsibility, a fiduciary duty to their clients of managing their money well. My main quibble with this is that cultures are difficult to change. Ranieri let the cat out of the bag in the 1980's, and it may be difficult to get it back in. Kay argues that senior executives in financial companies should be held strictly liable for misdeeds -- if anything goes wrong on their watch, the executives would face personal civil and criminal liability. Gone would be the days when the punishment for taking a large bank under would be a monthly pension of hundreds of thousands, rather than of millions. You would get less people applying for these jobs, as a result; but that is what we want -- conservative, sober, risk-averse types running the banks. The risk-takers can then go to the hedge funds.

We did not get these changes in regulation after the crisis ten years ago. The financial sector is politically powerful, and many of the regulators and politicians have been co-opted; mostly implicitly, in a process of 'intellectual capture', with regulators having drunk the Kool-Aid regarding the importance of a 'dynamic financial sector' for the economy. The conglomerates were not been broken up by the Obama administration. Nor can Europeans afford to feel smug: continental European countries, such as Germany and France, are firmly under the spell of their powerful regional banking lobbies, and have consequently dragged their feet over any banking reforms.

Kay thus argues that his book is a blueprint for democratic politicians getting ready to clean up when the next political opportunity arises: that is, after the next major financial crisis, which is already brewing, although nobody is able to tell beforehand when it is going to hit. This is a depressing prescription, and a reason for his book to be read widely. It is well written, understandable with no economics training, and important. There are some weaker bits, but by and large the book is a great read. So read it! Highly recommended.

[Marks54 · Rating 4 out of 5]

This is a very good trade book on the current state of finance following the crises of 2007-2008 by a distinguished British academic and consultant. While it goes over familiar ground to the dozens of good books written on the crisis, it has its distinctive points. The focus of the book is on the shift towards trading and away from traditional approaches focusing on client relationships. Kay notes how the changes in the nature of the finance business changed for the worse with the advent of the trading above all else mentality. What was most enjoyable to me was Kay's analysis of how, with all of the changes and with the huge increases in compensation to top finance people that went with the changes, the value provided by finance to the broader economy and to society more generally has not improved much at all - and has potentially declined. He argues treating finance like any other industry and proceeds to do so, looking at how the traditional financial functions - such as facilitating payments, allocating capital, enabling inter-generational transfers, promoting new businesses, etc. are actually being accomplished. The verdict is that finance is long on promises and claims and short on real contributions. Why? Because of a host of reasons and villains, but largely because the incentive structures needed to ensure performance of these functions has not been maintained.

What is there to do about this? Kay suggests paradoxically suggests less government involvement and less regulation but regulations and controls that are practical and capable of being performed by the actual people who work for regulatory agencies. As a big example, he notes how it may well have been better to let the big banks fail and then deal with the consequences rather than the avoidance of significant reform following the great crisis. More generally, finance should be viewed as any other industry and held accountable for its failures to serve consumers and the broader public.

The book is entertaining. His broader European perspective is also engaging and well tied in with US experiences. Kay is certainly one voice among many and her no doubt wants to sell books - but his book is thoughtful and wise. That goes a long way for me.

[Christian · Rating 5 out of 5]

A challenging book for me since I lack an economics or finance background, but incisive and understandable when read carefully. I liked how Kay took nothing for granted and always questioned why things function as they do today. He never accepted that a theory or method's position on the historical timeline was a marker of its place in an evolutionary march. The finance sector currently operates in unnecessary, damaging, and self-serving ways that don't follow the purpose of finance: to facilitate the support of business growth; to maintain a payments system; to fund retirements; and to restore infrastructure. The current finance sector seeks to simply exploit perceived or real flaws in the market for financial gain.

[Terry · Rating 4 out of 5]

Other People's Money is a critical consideration of the role and influence of finance and how it has changed through recent history. The book reviews the purposes and uses of finance and areas where it tends to get itself into trouble. The book also considers the interactions between markets and politics as well as how business is run.

The author's thesis is that the financial system does some very useful things but that most recent innovation doesn't advance these basic goals. The book is well reasoned and critical where it should be while being mindful of the legitimate role of finance. I will probably read it again soon.

[Daniel · Rating 5 out of 5]

The clearest book about modern finance I have ever read.

The main function of whole finance industry is supposed to arrange for payment services, and connect savers with borrowers (mainly buying houses). However today's finance involves passing other people's money around rather than contributing anything to the 'real' economy.

I had read quite a number of books about financial crises but this is the best.

[Chris · Rating 4 out of 5]

I loved this book. Kay is the rare combination of an excellent writer and highly knowledgeable financial academic and economist. As a usually gung ho free market guy, this book really tempered my enthusiasm for finance and made me truly realize that something in the industry is quite wrong and needs fixing. It is not a roadmap by any means but it is a book that can create some sparks that will lead to change.

[Tanya Sen]

A thoughtful and biting critique of the financial services system today. Felt more high level and theoretical than pragmatic in its proposed solutions, but his opinions gave much food for thought. Kay is master of the analogy - he uses some great metaphors to make his point. (The most memorable was the "parable of the ox" right upfront in the prologue).

[Oleh · Rating 5 out of 5]

An insightful description of values that are predominant in the modern financial industry. What do these people do for living? How does it affect us?

A highly interesting title. Complements the Big Short movie.

[Charlie Esam · Rating 5 out of 5]

An uncomfortable but necessary book about the role of the financial industry. Kay has vast experience as an economist and working with US/UK governments - he knows what he is talking about which makes his bleak assessment on what finance has become all the more concerning.

[Yalman Onaran · Rating 4 out of 5]

It's a very good overview of why the business of banking has become a burden to modern economy, forgetting about its original raison d'etre of allocating financial resources for economic activity.

[Daniel Wright · Rating 5 out of 5]

Essential reading for anyone whose life is in any way affected by the finance industry - i.e. everyone.

[Minervas · Rating 5 out of 5]

The financial market is puzzling. On the one hand, economists tell us it is essential to efficient resource allocation. On the other hand, it's counter-intuitive to believe that the perpetual changing of titles contributes much to the real economy. In particular, how could trading frenzies such as the GameStop fever create any value? Readers who have the same qualm as mine will find John Kay's book refreshing. Based on comprehensive evidence and eloquent arguments, John Kay shows that the financial industry is not serving the real economy well. Moreover, he provides a clear blueprint for future reforms.

Kay summarizes that a well functioning financial industry could contribute to a society in four principal ways: 1) providing a payment system, 2) matching lenders with borrowers, 3) helping people plan spending and saving across lifetime and between generations, and 4) helping individuals and businesses manage risks. He points out that the financialization since the 1970s did not focus on fulfilling these functions. Here are a few examples:
- The innovations of credit default swaps mainly deal with risks within the financial system. They do not help manage the main street risk: unemployment, divorce, illness, and provision for old age.
- In the US and the UK, as employer-sponsored pensions become scarce, individuals must manage the longevity risk on their own, exposing themselves to the risk of long-term economic recession.
- The Moneyball phenomenon — the substitution of statistics for gut instinct and conventional wisdom — improves outcome in some fields but do not help fund small businesses.

The ex-CEO of Goldman Sachs once claimed that people like him are "doing God's work." But what mainly are the self-proclaimed angels doing? They engage themselves in a massive amount of trading, trying to outwit each other. John Kay describes them as "ticket touts." Touts help genuine fans get a ticket when demand exceeds supply, but too many touts make price volatile and hurt the fans. The high volume of trading also makes financial institutions interdependent, creates difficulties in evaluating counterparty credit risk and the value of claims, and thus magnifies the risk on the entire market. Because banks hold ordinary people's deposits, governments are forced to bail out irresponsible decisions, which creates a moral hazard problem.

How can we change the game? John Kay reminds us to learn from engineers who build robustness into complex systems such as the electricity network. A robust system should be built on loose instead of tight coupling. The resilience of a single entity is good but never sufficient; the key is to reduce interdependence. For example, banks should not heavily depend on overnight funding as Lehmann did. After all, the urgency felt by financial professionals is unguaranteed. Only the boring part — the payment system — is essential for the modern economy. No terrible consequence would follow if the stock market closed for a week (as it did after 9/11), or a merger or IPO were delayed.

John Kay also argues for measures to push for financial institutions' vigilance in handling other people's money. He suggested enforcing higher standards on avoiding conflict of interest and seeking criminal/civil penalties for individuals in addition to organizations. Most importantly, he suggests building a firewall between the deposit channel and trading activities by 1) force banks to make the deposit-taking department set up separately and ready to be taken control in short notice, and 2) forbid cross-subsidy from the deposit department to trading. This ring-fencing will limit gambling with other people's money and ensure public money is only used to protect the payment system through deposit protection.

I like John Kay's analogies in the book. Besides the brilliant parable of the ox in the prologue, I was impressed by his mention of ticket touts, tailgating, comparison of London casinos with London bank, and the milkman who makes a double delivery on Christmas Eve. I was also impressed by how he helped readers imagine the financial industry before the 1970s by reminding us that the hero of It's a Wonderful Life is a bank manager, and Nick Carraway in The Great Gatsby works as a bond trader.

As for the weakness, I think the book sometimes opens too many fronts in its attack on the financial industry, and Chapter 3 and 4 could use a bit more editing to be more focused. I also wish John Kay could talk more about why the Finance industry becomes the way it is today. For example, why is there this insatiable appetite toward risky products?

Overall, the book is rich in contents, cogent in argument, and accessible to readers at every level. I don't have enough knowledge to judge whether John Kay has gotten every fact straight. But even if he hadn't, people who comment on finance should learn from his writing style.

[Jeffrey · Rating 4 out of 5]

In Other People's Money, Kay presents the argument against modern finance and instead winding back the clock to simpler finance system. Kay's main target is what he identifies as the excessive financialisation of the financial system - the trading super structure that sits atop the payments and markets that society needs to function.

In many ways, many of the arguments that Kay makes have been made elsewhere. The weaknesses in banking's transformation from a quiet profession where the bank manager almost personally knew everyone and expected to be in the job for life, to one that largely became anonymised (with loans were made at an increasingly rapid pace to be bundled in securities to be sold to buyers overseas) was exposed in the 2008 financial crisis. The misalignment of incentives when managing other people's money. Kay argues that the manager's intimate knowledge of clients gained from the golf course has been lost. But I suspect perhaps he is viewing the past with rose tinted glasses - the traditional banker's conservatism perhaps would not see everyone get credit. And perhaps the racial zoning experience of the past should leave us wary of leaving too much space to the idiosyncratic decisions of an individual.

Kay also takes target at the incentive structures that he says have corrupted and ossified the banking system. In its least damning light, the industry, academics and politicians as all drinking the Kool Aid, or the victims of "intellectual capture" that mean they lack imagination to change what is. At its most insidious banking is an oligarchy, he argues that banks' profit is used to buy political influence in self-reinforcing cycle that buys more power and secures the bankers' position. He highlights Thain's concern only for bonuses in 2008 bailout discussions.

On many points, Kay is correct. The finance is perhaps now too large, at least to be a private institutions. The problem of "privatising the gains and socialising the losses" can be solved be either downsizing banks to the point they do not need public guarantee, or recognising that finance is critical enough that it should be provided by the states. But in his crusade to pin the blame squarely on the banking industry he perhaps has missed another, larger target for blame: the one in the mirror, namely all of us as part of society.

For me, Kay does not follow a lot of his arguments through to their logical conclusion. Yes the bankers should shoulder their share of the blame, but they were reacting to the demand generated in society. He accurately highlights the Gemeinschaft–Gesellschaft dichotomy, but perhaps it is society's drift towards individualist values that is the larger overarching theme. We individually have forced banking to reform - personalised service that Kay pines for costs money, at the same time customers are forcing banks to cut fees to zero, thus forcing banks to respond by increasing volumes and speed of turnover. Kay correctly identifies the shift from stakeholder value to shareholder value, but perhaps the true origin of this shift is the increasing individualist zeitgesit. Companies are pressured to increase the share price by activist hedge fund managers, who are rewarded. But their money comes largely from the pension funds of all of, who are not content with market returns or whose mandates (from us) have set the required return too high. Lastly the individualised pensions for each person have come from governments who seek to reduce costs by slashing socialised pension obligations, because the voting public is unwilling to pay the taxes required to fund them. The same logic underlies the push since Thatcher to privatise public assets.

Kay's idea in correct in many ways and is a well-argued case against the financial system as it stands today. Even those in finance would be well-served hearing out this contrarian case - if anything to see the changes possible. Kay ends Other People's Money with a parable, which ends with the scientists going back to real work when finance is right sized to stop pulling all the talent. That is fair observation. But again perhaps, like I argued above, Kay misses a larger point - the scientists can go back to "designing rockets" when the government starts funding science endeavours (as JFK did). But that would require the voting public to shift back towards values of shared, common community and vote to increase taxes on themselves.

[Fips · Rating 4 out of 5]

‘I’ll be gone, you’ll be gone.’ That supposed shibboleth of the turn-of-the-century captains of finance, whose unrestrained pursuit of profits led western economies to the brink of collapse less than two decades ago, provides a suitable refrain to this review of the financial services industry.

If, like me, your understanding of the world of finance doesn’t extend much beyond trading cows for magic beans, this book does a decent job of explaining how this ‘industry’ developed, how it became so dangerously interwoven, and ultimately so seemingly detached from reality. Taking at its core the questions of what finance is actually useful for – facilitating payments, mediating between loaners and lenders, managing finance between generations, dealing with risk – Kay is fairly ruthless in taking to task the young scions whose gigantic balance sheets represent little more than houses of cards built by other players of the same game.

Many of the general tenets in the book are fairly logical and unsurprising. Why should a person with no skin in the game care very much about the risks of a transaction? Why shouldn’t traders adopt a nach uns die Sintflut mentality, when the likelihood is that failure will be borne by someone else? How should a person with no links to a community have any inkling about the actual financial situation of their customers (in contrast to Kay’s idealised bankers of yore in Captain Mainwaring or George Bailey)? Why should the sector reform when banks can afford to accept eye-watering fines as a minor inconvenience of carrying on as normal? When the system becomes so complex, how can it be possible to prosecute any but the most egregious of rogues? Why should we be surprised that bankers receive such stark opprobrium in contrast to similarly well-remunerated footballers or businessfolk, when their contribution to society appears to amount to little more than increasing our tax burden and giving our economies the wobbles every couple of decades? And what is the point of having some of the more intelligent minds of our generation spend their energies developing algorithms to outperform the algorithms of other intelligent minds for Mammon’s purpose?

The latter third of the book deals with potential reforms and – for a layman who otherwise only ever hears the word ‘regulation’ as some kind of financial thermostat for keeping these ills from boiling over – interestingly this isn’t the core of Kay’s message. In fact, increasing layers of regulation only make the loopholes more convoluted and difficult to police; and when those investigating potential wrongdoing are funded to a microscopic level in contrast with their charges, while wrongdoers can afford to pay the fines anyway, making their jobs more difficult only adds to the problem. However well-intentioned the regulatory framework, ‘money will find a way’, as some visitors to a dinosaur theme park famously never said.

So what’s the solution? Honestly, I’m too thick to understand. But the overall tenor of the book seems to be one of pessimism. It isn’t more regulation but better regulation that is needed. And while there are potential ways to improve the system, they are politically unworkable without collaborative effort. Since the only people in whose interest that would be are in the bottom 99%, it seems an unlikely prospect. After all, the 99% managed two months on Wall Street, before having to go back work. We successfully survived the last crisis by hoofing the can down the road. May our future selves deal with it the next time the house of cards threatens to come crashing down, and the queues at Britain’s foodbanks can breath a collective sigh of relief that the cap on bankers’ bonuses aren’t coming back any time soon.

If you know what you’re talking about, Athan Tolis’ review seems like a fair and balanced critique of this book which suggests Kay’s proposals and conclusions often miss the mark, but for the rest of us, the book is digestible enough to provide some meagre understanding of an opaquely complex system, its origins, problems, and potential solutions.

[Kirk Houghton · Rating 4 out of 5]

The 2008/09 global credit crunch has created a boom in books about High Finance. Making ‘money out of money’ fascinates and infuriates us and often reaches a peak of interest following the downturn of the business cycle. Indeed, those millionaires that got rich speculating on commodities and share prices once basked in the glory of being a stabilising influence on the world economy. Then came the 2007 sub-prime crisis, the Lehman Brothers collapse of 2008 and the 2009 recession. For one brief summer graduates in Engineering, Astro-Physics and Mathematics decided a career on Wall Street might not be their destiny.

Skip forward seven years and things are back to normal. The brightest and best seek their fortune in the City and hope to get rich speculating on various price movements in the market. What has gone wrong with the Financial Sector and what does it say about our society?

John Kay tries to answer these questions and is on a mission to challenge some of the assumptions we have about the role of Finance in the aftermath of the last economic meltdown. On the whole, his analysis is successful and enlightening.

The author’s first priority is to describe how Investment Banking has moved so far away from its original purpose of providing capital for infrastructure and industrial growth. Take Goldman Sachs where underwriting debt and new equity for companies represents less than 10 percent of the bank’s net revenue. In other words, 90 percent of Goldman’s earnings are from Fixed Income, Currencies & Commodities (FICC) trading. This begs the obvious question: how useful is this to society?

But perhaps Kay’s most poignant observation is that a lot of global businesses today need not list on the stock market to fund expansion. As he points out, Exxon Mobil invested $20 billion on infrastructure and exploration projects in 2013, all from its own resources. In the same year the company spent $16 billion buying back its own shares and paid out $20 billion in capital. In total, Exxon Mobil has spent around $100 billion in the last ten years repurchasing securities it previously issued.

So why do companies list on the stock market if they don’t need capital? According to Kay, the nature of today’s companies are so much different to the railways and breweries that used to pursue capital-raising projects in the early twentieth century. And the facts don’t lie: operating assets make up little of the capital-intensive activities of modern enterprises such as Apple (only 3 percent). Instead, reputation, human capital and brand prestige are just as important to tech companies as plant maintenance and making the most of productive capacity. In reality, they undertake IPOs to realise value for early investors.

‘Stock markets are not a way of putting money into companies, but a means of taking it out,’ insists Kay in the iconoclastic style that characterises his writing. To be fair, he has a point: forty members of Apple became overnight millionaires when the company listed in the late 1980s. Today’s giants are similar: Google and Facebook were generators of cash early on and don’t need to raise billions to build new plant and develop infrastructure like the industrial behemoths at the turn of the twentieth century. Facebook’s ambivalent 2012 IPO prospectus more or less admitted the Board had no specific plans for the money raised on the Nasdaq.

If Main Street has been lagging behind Wall Street, the former now have a tutor in Kay. More statistics and observations follow like a swarm of bees hoping to sting you out of your ignorance. Why did Apple raise $17 billion in a bond offering in 2013 to pay a dividend? Did they need the money? No, but repatriating the cash from foreign jurisdictions would have incurred unfavourable taxes in the US.

Next in the firing line is our obsession with emulating Silicon Valley. Why do the Anglo-Saxon nations not cast an eye at the German Mittelstand for inspiration? The Stock Market value of German companies is only 40% of national income; the figure is over 100% in the US and UK. Yet Kay sees the grubby influence of Canary Wharf and Wall Street on this last bastion of productive capitalism as a defining battle for the future of Finance. Global investment banks have been trying to develop Germany’s capital markets in debt and equity for the last 30 years and may one day corrupt the nation’s world class family enterprises at the centre of its economy. Though the alchemists have had little success so far, the European Commission seems to be on the side of Goldman Sachs rather than the industrious pioneers and producers of the German heartlands.

Thankfully, the Mittelstand have shown scant interest in listing on the stock exchange and are more than capable of funding expansion through their own internal resources. Successive generations of family ownership and professional management are the key to their success. The author’s admiration for this unique producer class is clear: ‘In Britain and the USA successful medium-size businesses grow by acquisition or are themselves acquired. But this ‘hollowing out’ of the middle of the size distribution of companies has not occurred in Germany.’ (P.171) Expect Kay to write the epitaph if the vultures get their way.

If the Mittelstand represent an ideal of capitalism, the growth of Limited Liability companies mark one of its aberrations. Here we get the usual excoriations against Sandy Weil’s Citigroup and predictions that Salomon Brothers and Lehman Brothers might still be around if they’d retained their Partnership structure with their own capital on the line. The cue to rally against the demutualisation of British Building Societies is not without merit, but the author’s main criticism is how too many CEOs now prioritise their share-price above all other concerns. Hey, it’s not their money, so why not take bigger risks for the potential of huge gains?

The rise of Mark-to-Market pricing since the late 1980s has also helped the modern PLC create the illusion of wealth. Once a supporter of this valuation, Kay now admits that marking assets at full value of what they are likely to earn before their maturity is an easy way of inflating earnings and generating bonuses for senior staff. Geoff Skilling’s success in getting the SEC to authorise Enron to trade gas contracts allowed him to take advantage of this accounting method and book the full P&L in the present rather than as a steady stream of income over a longer period. Bear Stearns, Lehman Brothers, HBOS and RBS succumbed to the same temptation.

One final argument in this book that will get attention is the author’s assessment the Financial Sector has too much regulation, not too little. This is the most contentious part of the whole study and the least articulate of Kay’s judgements. Numerous pages are devoted to lamenting the evils of ‘Regulatory Capture,’ but the reader may still wonder what this means, other than an ill-defined advantage today’s lobbyists have over regulators.

Fortunately, Kay’s analysis of ‘Regulatory Arbitrage’ is far more intelligible. What do the growth of London’s Eurodollar market of the 1960s and the Credit Default Swap of modern times have in common? Answer: They both evolved as a way of circumventing the law. The former, known as Regulation Q, is a good example of unintended consequences. Government intervention after the Great Depression put a limit on the level of interest US Banks could offer depositors; capital reserve requirements were also high. But money lent to American banks from European institutions escaped the provisions; therefore, the former could recycle funds via Britain to get round the rules. Result: US banks found a way to pay higher interest on deposits and London banks enjoyed renting out their services for a commission. Alas, the Eurodollar market emerged thanks to a regulatory loophole.

It’s easy to see why Other People’s Money made the Longlist for the 2016 Orwell Prize. The author is an Economist with a gift for explaining complex subjects and making Banking & Finance accessible to a wide audience. However, a tendency to pre-warn the reader certain topics will be covered in more depth in later chapters can be repetitive (and confusing) and Kay, like many others, does not offer a convincing definition of Derivatives. This is a shame because he should excel at describing a ‘Put’ option on a Forward Contract or articulating the intricacies of an Interest Rate Swap. (Topics that still baffle me.)

The ‘Financialisation’ of our society may be irreversible unless western civilisation lapses into war, but until then today’s Science Graduates may continue to deprive us of their productive skills to trade commodities instead. The end of ‘Casino Banking’ is nowhere in sight, but stopping Investment Banks using deposits from their Retail operations is the first of many changes that need to happen if we are to prevent another crash. Like John Plender, Sir Mervyn King and Alex Brummer, the author is keen to add his name to the list of prophets lamenting the inevitability of the next crisis.

[Don · Rating 3 out of 5]

Kay’s experience as a banker straddles the period of the Mr Mainwaring local manager whose join was to make loans to people who he knew could afford to pay them back, and the super-smart trader who relies on the figures that flash on a screen to make the deal. He does not regard the path of this evolution as progress.

The heart of his critique as to what is wrong with our modern system of managing finance is a view of the real interests that need to be served by the banking system. In his view it should be about managing the wealth of households in ways that allow it to be support prosperity across lifetimes and generations. The savings deposits made by citizens need to be accessible to responsible businesses and public bodies so that investment can flow into infrastructure that benefits the entire population.

His complaint is that what has developed since the 1980s no longer does that, at least in any way that is sustainable. Nowadays loans to business make up a tiny part of the activities of financial of the institutions that make up the finance industry. Instead most trading is in securities – a system which allows traders to establish claims against such assets as the future profits of a company or the prospective earnings on an individual. But this approach has been around a long time and in itself is unexceptional. What is really significant about the epoch of financialisation is the way that trade in securities has produced markets in derivatives – a type of security whose value is derived from the value of other securities. As Kay explains, simple securities are claims on the value of assets: derivatives are claims on the value of securities themselves.

According to Kay’s account, the trigger for the explosive growth of derivative trading was the changes to the structure of the world’s leading stock market which came about in the mid-1980s. In the UK this was associated with the ‘Big Bang’ deregulation of trading in shares that came into effect on a memorable day in 1986. The monopoly of the leading stock exchanges came to an end and a rivalry was set up between the structures that grew in the place of the old monolith. The distinctions between the brokers and jobbers around which the outmoded system had hinged came to an end and new trading activities came into play that required ever more volumes of capital.

This last requirement asserted a magnetic effect on other financial institutions which had been run in the past as public companies, partnerships or mutual. Each had their own systems of checks and balances that regulated the flows of investment in more-or-less transparent ways, but also limited opportunities to take punts in the new range of trading activities. Over the course of the decade decade and a half this diversity of structure was brought to an end and most finance business became public companies listed on stock exchanges. Kay states that “The primary motive for conversion was to enable a current generation of partners or members to realise the goodwill of the business for their own profit.”

What followed was a succession of crises as the restructured companies found themselves exposed to risks which proved unmanageable. Lehman Brothers hit the first of their problems just two years after it converted to public company status. Members of the Halifax Building Society who retained their shares after it de-mutualised lost all of their windfall gains when the business was merged with HBOS. Under the old partnership structures the CEOs who had presided over strategies which proved disastrous would have paid a personal price for their ineptitude. As the heads of public companies they remained extremely rich. When public money was brought in to salvage businesses brought to the point of bankruptcy many of the senior managers responsible for the misdirection did not even lose their jobs.

Kay moves the story on from this to show how business strategies went in pursuit of the mirage of supposedly risk-free investment. An ‘LMX spiral’ came into existence, in which contracts which aimed to secure insurance against loss themselves became tradeable assets. As Kay says. “If you can create profit by selling re-insurance contracts, you can also earn profit by selling for the re-insurance of re-insurance.” He goes on to say “…so elaborate and complex [had it become] is was simply impossible to ascertain the underlying risks to which the holder was exposed.”

The stage was thus set for the great financial crisis triggered in 2007 by the sub-prime mortgage scandal in the United States. The account of how the selling of mortgages to individuals without any means to service their debts has been given so many times and Kay only deals with it with a broad sweeping brush. In this book he is more interested in explaining why it was that the finance industry entered this disastrous phase without any means to check or curb its most destructive, reckless impulses. Back before financialisation this was in place, in the form of the boring but safe Mr Mainwarings who operated in local communities and had their own means for assessing the risks that might be involved in lending to any particular customer. Under the news dispensation the deal-makers were preoccupied only with the question of how they made money out of this as quickly as possible, so they could move on and leave the mess for others to sort out.

‘You’ll be gone, I’ll be gone’, became the mantra of the thousands of traders drawn into markets by the prospect of earning lots of money very quickly. But in an industry that is supposed to be so tightly regulated by government strictures, why wasn’t this culture dealt with?

Kay’s answer is that government regulation failed so spectacularly – and continues to do so – because it set itself the wrong targets. The objective of its work has been to secure the integrity of the market rather than to control the actions of the individuals working within the system. Markets are an abstract concept and the outcome of any single or aggregation of measures is difficult to predict. Further, regulations which are intended to make things more transparent and honest simply invite the business strategists to come up with ways of getting around them without, or so they claim, actually breaking the law. This is an unwinnable game for the regulators, who will always be bested by businesses flush with cash and willing to pay any amount to lawyers and accountants who will come up with ways to evade the intended effects of regulation.

This is the reason why Kay is no fan of those who call for the system to be fixed by yet a further round of regulation. He aims for a more radical solution, which requires a restructuring of the industry in order to bear down on the actions of individuals. The scandal being addressed here is the one in which a legion of businesses bosses made themselves very rich by activities which, although often not actually illegal, were reckless in the extreme. Further, the assurance that they were at the helm of companies ‘too big to fail’ meant that their losses would be covered by the taxpayer, or the users of the public services that would inevitably be shredded in the fiscal crisis provoked by negligent financiers. Named and shamed some might possibly be, but the damage to their personal wealth has time and time again shown to be negligible.

Kay’s solution is to make them pay, with serious jail time and financial penalties, on the principle that you carry the can if things go so badly wrong. No defence should be listened to which has a CEO wailing that he simply didn’t know what was going on in the trading rooms and was as shocked as everyone else when it all went belly-up.

It seems as obvious point but it is more than curious that this straightforward, robust approach has found so few takers amongst the political establishment. The mainstream parties clam up when the prospect of seeing the people they have been wining and dining for years being sent to prison is raised in public discussion. The parties of the so-called new populist insurgency are usually led by individuals joined at the hip to financial interests, so little can be expected of them. The extension of Kay’s analysis on how financialisation corrupted the banks and all the other bodies responsible for managing the assets of households and rolled out across the political classes and state functionaries has, one hopes, been written elsewhere, along with the prescription as to what we need to do to deal with the problem.